Based on the view of various market analysts the consensus is that 2014 is shaping up to be another good year; growth figures are optimistic, inflation looks set to rise and interest rates are likely to remain steady.
The General View of the World Economy
The recovery from the 2008/9 financial crisis has endured many false starts but the consensus of the major investment houses is that we should be optimistic about 2014.
Source: Morningstar
Who Will Lead Economic Growth?
US Economy
Despite strong returns in the US stocks markets the data about its economy has largely underwhelmed analysts this year. The inability of the US Government to prevent a partial shut-down and constant bickering about the debt-ceiling appears to have depressed activity in both September and October. This lack of clear direction and leadership is an important factor to the Fed’s decision to maintain its quantitative easing strategy.
Much of the upturn in global growth in 2014 will be based on whether the US can transition from recovery to sustainable expansion and with Q3 and Q4 GDP 2013 results looking tepid, much uncertainty still remains. However, not all are disheartened, some analysts are predicting positive tailwinds and hopes of a rebound next year.
Eurozone Economy
Data from the Eurozone continues to ease fears and point to a recovery, albeit a very weak one. GDP forecasts point to a growth of 0.1%-0.2% growth for Q3 and slightly more for Q4. However, it is likely that the overall result for the year will still be a contraction of 0.3%.
The PIGS of Europe (Portugal, Ireland, Greece and Spain) and other peripheral countries are all forecasting positive growth for next year, which continues to increase confidence in these struggling economies. The ECB is focusing on a “Comprehensive Assessment” of the banking sector, which despite almost certain road-bumps should further restore confidence in the financial system.
UK Economy
“Britain is booming, again” is the cry from many pundits as Q3 GDP figures signal a sustained economic upturn is taking holding. The annual growth rate of 3.1% in its economy is the highest in over three years, largely led by the services sector, which makes up nearly 80% of the economy. However, the current figures are still someway below their highs of Q1 2008.
The government deficit is shrinking as a result of this strong growth and with the general election only 18 months away, fiscal policy is likely to become more supportive.
Japan Economy
Despite a really strong start to the year the Japanese economy lost some of its momentum over the summer months. Q3 GDP forecasts have been revised due to sluggish private consumption as a result of weather-reltaed issues. However, many are predicting a strong rebound in Q4 and reasonable year-on-year growth.
Analysts are worried that real wages are continuing to fall while inflation picks up. This is a trend that must be reversed in order to create a true sustainable expansion. The “Third Arrow” reform programme from Prime Minister Abe is a start, but it is still in the early stages and more needs to be done.
China Economy
Recently installed Premier of China, Li Keqiang, has stated that China must maintain a growth rate of 7.2% in order to ensure stable employment. In Q2 this figure was a little bit of a worry as the economy seemed to have slowed to 7.0%. However, the data since this time has been more positive and the latest PMI data suggest the upturn will continue into Q4. Officially reported figures currently show that the overall economy grew by 7.8% year-on-year.
Other Economies
Data from the ASEAN economies has been a bit of a mixed bag with a particularly weak Q3. Similarly Latin America has had a tough year so far. The latest forecasts from analysts are suggesting that both the ASEAN region and Latin America will improve in Q4 and there is hope this may continue into 2014.
Source: Morningstar
Where could it all go wrong?
There are several risks to the growth of the global economy that are worth considering.
Despite some calling time on the power of the US economy, its importance to global growth in 2014 cannot be underestimated. The US corporate world has so far failed to increase its capital investment programmes in any meaningful way and this has impacted private sector domestic demand. It is vital for corporate spending, in particular hiring, to be increased for there to be a sustained expansion in the US.
China, still the world’s economic engine-room, represents another risk to global growth in 2014. Despite the improved data emanating from Beijing, the country is still facing a credit boom, an overheated property market and rising bond yields.
Will inflation be a important in 2014?
Developed economies have largely undershot their CPI targets pointing to the fact we are still in a disinflatory phase. The lessons of long-term Japanese stagnation weigh heavy on world leaders and much will be done to fight deflation, particularly in Europe. It will take stronger growth for a longer period of time before inflation becomes a threat.
If the US economy continues to grow at or above its current pace over the next few years, the long-term view would point to an acceleration in inflation. This could be helped by new Federal Reserve Chairman, Janet Yellen, who is widely viewed to be more tolerant of higher inflation.